Peru Monetary Policy September 2019

Peru: Central Bank holds fire in September

At its monetary policy meeting on 12 September, the Central Bank of Peru (BCRP) kept the policy interest rate unchanged at a nine-year low of 2.50%, following August’s 25 basis point cut. The decision matched LatinFocus analysts’ expectations.

Well within target inflation and inflation expectations, and some signs of recovery in economic activity at the outset of Q3 prompted the Bank to hold its ground in September. Inflation inched down to 2.0% in August (July: 2.1%), thus hitting the mid-point of the Central Bank’s target range of 1.0%–3.0%. Meanwhile, consumer confidence ticked up in July, and the pace of credit growth remained robust in the same month. That said, business sentiment weakened in the first two months of the quarter and public investment underperformed in the January–August period.

In its forward guidance, the Bank remarked that monetary policy has to remain expansionary, and stated further cuts could be necessary going forward. Under current conditions, inflation is expected to trend near the mid-point of the target range, although sustained weakness in domestic demand could dent price pressures going forward.

Economic activity shrank 3.4% year-on-year in the first quarter of the year, the fastest contraction since Q1 2001, after expanding 1.8% in Q4 2019.
Hampered by Covid-19 fallout, the downturn was spearheaded by a severe contraction in the external sector, which subtracted 2.2 percentage points from the overall outturn (Q4: 0.0% year-on-year).

Merchandise exports plummeted 37.6% over the same month last year in March, the worst reading on record, as restrictions on movement to fight the Covid-19 pandemic disrupted production in the country and external demand for goods also evaporated amid the health crisis (February: -2.4% year-on-year).

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